July 2010 Archives

Flood Insurance: A Most Annoying Gamble

Like a large number of homes in the San Francisco Bay Area, the home I share with my partner lies in a 100-year flood plain.  This doesn't mean it floods every 100 years.  It means that every year there's a 1% chance of a flood.

To get a mortgage in an area that could flood, it's mandatory to carry flood insurance, and with the best of intentions to help people with flood insurance rates that would otherwise be cost-prohibitive, the federal government established the National Flood Insurance Program, which falls under the FEMA umbrella.

One doesn't purchase insurance directly from NFIP; you still buy it from an insurance broker, but they're all reselling NFIP policies, so they will all quote exactly the same rates.  Presumably they get some commission out of the deal.

I say "rates" because there's actually magic behind the insurance rates that ordinary mortals such as myself cannot understand, and there are no tools available to make the rates easier to comprehend and more practical to predict.  When you first ask for flood insurance, you are quoted the maximum possible rate.  This is because NFIP defaults to automatically assuming the worst about your situation. That's probably a reasonable default posture.  The problem is that very little detail is provided about how the rate is derived and no detail at all is provided regarding how it could be improved.

If you're lucky, they'll tell you about Elevation Certificates.  Elevation Certificates "might" lower your rate, they'll say.  An Elevation Certificate basically certifies the elevation of the bottom floor of your house and whether that floor is above the flood elevation for your area on the map.  So if, for example, the flood elevation is 7 feet (that is to say, the level water might reach is 7 feet above sea level), you'd want the bottom floor of your house to be above 7 feet.

Oh, but there are caveats.  Most homes in the area have crawlspaces beneath them.  And to NFIP, your crawlspace, if it is below the flood elevation, is a basement until proven otherwise.  They don't tell you this at first.  No, first you spend $500 to have a surveyor or civil engineer come to your property, take measurements and mail you an elevation certificate. Then they tell you that for your crawlspace to be a crawlspace (and not a basement), you need to have as many square inches of vent space as you have square feet of crawlspace.  In other words, if your crawlspace is 1600 square feet, you must have 1600 square inches of venting (and they can't all be in the same wall of course).

The other thing they don't tell you is about attached garages.  If your garage is attached to your house, there's a chance you might use your garage for something other than merely storing your vehicle.  And this is probably true for the vast majority of people, so it is not an unreasonable assumption.  Your garage, too, must contain as many square inches of venting as it has square feet of space.  Luckily the venting can be in the garage door(s), but it must be there.  500 square feet of garage?  500 square inches of vent openings.

Now let's suppose you got burned on your first elevation certificate which you were told could make your rate as low as $556 but instead you were stuck with the $1983 price because your crawlspace, unbeknownst to you is actually a basement, even though you spent $500 to have a civil engineer take the measurements and issue the certificate.  And let's suppose that you made the upgrades to your home, adding vents to the crawlspace and the attached garage.  The upgrades themselves are cheap-- vent covers are inexpensive, and if you have the tools you can make the adjustments yourself fairly easily in a weekend or two.

Then comes the moment of truth- do you spend $200 more to have the civil engineer come back out, count the new square inches of vents and issue a new certificate to give to the NFIP people?  Before you did this, you might want to verify with your insurance company that this time, Charlie Brown, this time you'll get to kick that football and save a lot of money ($1400!) each year on your flood policy.  The flip-side is that you might spend $200 and have absolutely no change, miss the football, and land flat on your back, having wasted $200 and still having the default worst-case-scenario rate.

You might think, "hey, I'll give my insurance company a call and ask them to run the numbers for me."  That's a reasonable thing to think.  After all, when you're car shopping, you can have the insurance company run numbers for you for hypothetical scenarios-- different makes and models of car, different levels of coverage, etc.  You can even do this for other types of home coverage, such as fire damage, checking different deductibles, coverage for personal items, etc.

Not so with flood insurance.  It's a black box.  It's opaque.  The answer you get back is "your rate could be as low as $556 with an elevation certificate."  It's the same answer you got the first time, before you wasted that first $500.  You cannot get a hypothetical rate based on values you intend to update on your elevation certificate or values you might have already updated.  You have no way of knowing if that $200 might lower your rate $1400 a year, or if it might do absolutely nothing.

Neither the NFIP nor the insurance carrier has any motivation at all to help you lower your premiums.  It cuts into the program's income and the insurance broker's commission.  The end result is that, ironically, you're punished for doing the responsible, right thing-- trying to upgrade your home to make it less likely to incur damage in the event of a flood.

It's a gamble.  A most annoying gamble.  If you're like me, you'd gladly spend $200 to save $1400... but you hesitate when there's no assurance whatsoever that your $200 might end up saving you $0.

Which brings me to where I am this morning-- trying to get some answer out of my insurance carrier.  All I want is for them to tell me that with the new numbers, my premiums would come down (versus the generic answer about having an elevation certificate that I know now to be only half the truth).  They won't do it.  It's eternally frustrating.  Now I must decide if I'm going to ante up again.

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This page is an archive of entries from July 2010 listed from newest to oldest.

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